We consider monetary-fiscal policy interactions in a monetary union. If monetary
and fiscal authorities have different ideal output and inflation targets, the Nash
equilibrium output or inflation or both are beyond the ideal points of all authorities.
Leadership of either authority is better. Fiscal discretion entirely negates the
advantage of monetary commitment: The optimal monetary rule is equivalent to discretionary
leadership of monetary over fiscal policy. Agreement about ideal output and inflation
creates a monetary-fiscal symbiosis, yielding the ideal point despite disagreement
about the relative weights of the two objectives, for any order of moves, without
fiscal coordination, and without monetary commitment.
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